Question 1

Another name for diversifiable risk is

Accepted Answer

A)  systemic risk.
B)  inflation risk.
C)  idiosyncratic risk.
D)  cyclical risk.E) A) and D)
F) B) and D)

Question 2

Riskier investments tend to sell for

Accepted Answer

A)  lower prices, so they provide a higher expected rate of return to compensate for risk.
B)  higher prices, so they provide a higher expected rate of return to compensate for risk.
C)  higher prices; that is why they are considered to be riskier.
D)  prices directly correlated with expected rates of return.E) C) and D)
F) None of the above

Question 3

Investment returns

Accepted Answer

A)  are always positive.
B)  are only received when an asset is sold.
C)  are only received when there is a stream of multiple payments generated by the asset.
D)  can be received either through the sale of an asset or as a stream of payments.E) A) and B)
F) B) and D)

Question 4

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month.His expected annual rate of return from renting the house is approximately

Accepted Answer

A)  8.0 percent.
B)  9.6 percent.
C)  19.2 percent.
D)  20 percent.E) C) and D)
F) A) and C)

Question 5

Bond payments are generally more predictable than stocks because

Accepted Answer

A)  interest on bonds is not taxable.
B)  stock prices and dividends exhibit little volatility.
C)  bonds generate higher average rates of return.
D)  bond owners know the size and timing of payments they will receive.E) All of the above
F) A) and B)

Question 6

Maria is looking to buy one of two houses to rent out for additional income.She determines that the first house, priced at $200,000, could rent for $1,500 per month.If the second house is priced at $280,000, how much rent would Maria have to charge to get an equivalent yearly rate of return?

Accepted Answer

A)  $2,100 per month
B)  $2,600 per month
C)  $2,800 per month
D)  It cannot be determined with the information given.E) A) and D)
F) C) and D)

Question 7

A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

Accepted Answer

A) True 
 B)False

Question 8

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Accepted Answer

A)  8 percent.
B)  10.4 percent.
C)  12.2 percent.
D)  24 percent.E) B) and C)
F) A) and C)

Question 9

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Accepted Answer

A)  capital gains; dividends
B)  dividends; capital gains
C)  interest; dividends
D)  interest; capital gainsE) A) and B)
F) A) and C)

Question 10

The present value model of investment states that an asset's current price should be equal to the

Accepted Answer

A)  sum of the present values of all of its future payments or earnings.
B)  sum of all of its future payments or earnings times the number of years of its life.
C)  life of the asset times the present values of all of its future payments or earnings.
D)  present values of all of its future payments or earnings divided by its life in years.E) A) and D)
F) None of the above

Question 11

The average expected rate of return of a financial asset equals

Accepted Answer

A)  the rate that compensates for time preference plus the rate that compensates for risk.
B)  the rate that compensates for time preference plus the rate of inflation.
C)  beta plus the rate that compensates for risk.
D)  the risk-free interest rate plus the rate of inflation.E) All of the above
F) B) and C)

Question 12

(Advanced analysis)  Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Accepted Answer

A)  8.75 percent
B)  9.1 percent
C)  10 percent
D)  10.4 percentE) A) and D)
F) A) and C)

Question 13

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Accepted Answer

A)  remain unchanged, as the house price and the rate of return are independent of each other.
B)  be 13.6 percent.
C)  fall from 9 percent to 8 percent.
D)  fall from 10.9 percent to 9.6 percent.E) All of the above
F) B) and C)

Question 14

Which of the following financial assets is considered to be essentially risk-free?

Accepted Answer

A)  gold
B)  stock in Fortune 500 companies
C)  real estate
D)  short-term U.S.government bondsE) B) and C)
F) A) and B)

Question 15

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Accepted Answer

A)  $604,000
B)  $624,000
C)  $680,000
D)  $700,000E) A) and B)
F) B) and D)

Question 16

One fundamental concept in financial economics is that an investment's rate of return is

Accepted Answer

A)  positively related to the price paid for it.
B)  inversely related to the price paid for it.
C)  inversely related to the riskiness of the investment.
D)  inversely related to the maturity of the investment.E) B) and D)
F) A) and B)

Question 17

(Last Word)  Before being adjusted for costs,

Accepted Answer

A)  actively managed funds outperform index funds.
B)  actively managed funds and index funds perform about the same.
C)  index funds outperform actively managed funds.
D)  arbitrage equalizes the average expected rates of return and beta levels on index and actively managed funds.E) A) and D)
F) None of the above

Question 18

Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

Accepted Answer

A)  significantly higher than those of index funds with similar risk.
B)  significantly lower than those of index funds with similar risk.
C)  about the same as those of index funds with similar risk.
D)  more volatile than those of index funds with similar risk.E) C) and D)
F) B) and D)

Question 19

Index funds are an example of passively managed funds.

Accepted Answer

A) True 
 B)False

Question 20

The U.S.federal government is unlikely to default on its bonds because

Accepted Answer

A)  the bonds are all long-term bonds and they are insured.
B)  the federal government has the ability to collect taxes and to sell securities to the Fed.
C)  foreigners are willing to buy the federal government bonds and lend to the U.S.government.
D)  the federal government can always borrow from the states and from businesses.E) A) and B)
F) B) and C)

Exam 17: Part C: Financial Economics

Investment returns

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One fundamental concept in financial economics is that an investment's rate of return is

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The present value model of investment states that an asset's current price should be equal to the

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A 10 percent rate of interest will increase the value of an asset more quickly if the interest is compounded.

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Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are

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Another name for diversifiable risk is

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Which of the following financial assets is considered to be essentially risk-free?

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Index funds are an example of passively managed funds.

Correct AnswerverifiedShow Answer

The U.S.federal government is unlikely to default on its bonds because

Correct AnswerverifiedShow Answer

You estimate that a piece of real estate for investment will be worth $700,000 in five years.The current interest rate is 3 percent.What is the present value of this investment?

Correct AnswerverifiedShow Answer

Burt bought a house for $250,000 and plans to rent it out for $2,000 per month.His expected annual rate of return from renting the house is approximately

Correct AnswerverifiedShow Answer

Bond payments are generally more predictable than stocks because

Correct AnswerverifiedShow Answer

Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will

Correct AnswerverifiedShow Answer

(Advanced analysis) Ricardo deposits $1,000 into his savings account.What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

Correct AnswerverifiedShow Answer

The average expected rate of return of a financial asset equals

Correct AnswerverifiedShow Answer

Owners of stock can receive from their shares; sellers of stock can receive from selling their shares.

Correct AnswerverifiedShow Answer

Maria is looking to buy one of two houses to rent out for additional income.She determines that the first house, priced at $200,000, could rent for $1,500 per month.If the second house is priced at $280,000, how much rent would Maria have to charge to get an equivalent yearly rate of return?

Correct AnswerverifiedShow Answer

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40.Jacob's average expected rate of return on this investment is

Correct AnswerverifiedShow Answer

(Last Word) Before being adjusted for costs,

Correct AnswerverifiedShow Answer

Riskier investments tend to sell for

Correct AnswerverifiedShow Answer

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